Last May, I wrote an article about Twitter Inc (NYSE:TWTR) and Twitter stock. Despite being a flawed stock, I thought there was enough light at the end of the tunnel for investors to consider taking a small position.
Trading at less than $19, I thought Twitter stock had a little room to run, but never in my wildest dreams did I anticipate the 74% appreciation that it would achieve over the next ten months. I called Twitter stock, “Flawed.”
However, I suggested at the time that Twitter was making progress reducing the number of fake accounts or bots on the site as well as eliminating the number of incidences of abuse would go a long way to improving Twitter’s image.
By addressing these two issues along with the change to 280 characters, it appears these moves have helped the company turn profitable and that, naturally, has lit a fire under TWTR stock.
A Buy at $32 and Change?
My InvestorPlace colleague Tom Taulli doesn’t think so.
“From a valuation standpoint, it looks like TWTR has already accounted for much of the good news — and then some,” wrote Taulli Feb. 21. “Consider that the forward price-to-earnings multiple is at a nose-bleed 49x. This compares to FB’s 20x and GOOGL’s 23x.”
Hey, I get where he’s coming from.
In my article from last May, I too was worried about its valuation, but that was before it started making money on a GAAP basis.
“My big concern with owning TWTR is that analysts project year-over-year revenue will decline in fiscal 2017,” I stated May 3, 2017. “Unless it can figure out how to squeeze more profits out of its revenues, Twitter’s got no chance of making money on a GAAP basis in 2017, or perhaps even in 2018, making its current 4.7 price-sales ratio a little pricey.”
Fast forward to today and Twitter’s P/S ratio has more than doubled to 10. Back then, if you had guaranteed me that Twitter would deliver a quarterly profit in 2017, I’d have said its price-to-sales ratio was more than fair.
Are Cuts Enough?
As Tom pointed out, Twitter had Q4 2017 earnings per share of 12 cents, 35 cents better than in the same period a year earlier, not because of any significant increase in revenue — they were up 2% year over year to $732 million — but from a massive cut in operating expenses.
Twitter made cuts to all four expense line-items reducing operating expenses from 120% of revenue in Q4 2016 to 85% in Q4 2017. That’s $239 million in cuts or almost a third of its operating costs.
The company’s cuts to expenses were so steep this past year that it managed to generate an operating profit in 2017 of $39 million, the first time in its history.
While I have my doubts whether Twitter can remain independent for very long, the fact that it’s making money, international ad revenues are growing, and engagement’s been pretty good at least gives it more time to make itself more attractive to potential suitors.
Bottom Line on Twitter Stock
To say Twitter stock is perfect would be the farthest thing from the truth. It was flawed last May and it’s still flawed.
That said, Twitter’s done enough to get itself back in the spotlight where it can show off why it’s still a relevant social media platform. Personally, I think there’s less risk for investors ten months later at $32 than there was last May at $18 and change.
Now, more than ever, I see Twitter getting acquired by deep pockets. Whose pockets, I couldn’t tell you.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
